Central Bank Gold-Buying Increases by 500%

The World Gold Council recently released its own report for the gold market for 2011. It noted that while global demand for gold had hit a new all-time high in (nominal) dollar terms , it was merely reaching its highest level in 15 years in terms of tonnages.Hardly the signs of an “over-heated” market, as is regularly claimed by the flock of mainstream Chicken Littles clucking about a “bubble” in the gold market.

Indeed, investment demand rose by a mere 5% year-over-year. Arguably, even that number overstates the performance of the gold market in 2011, since (in the real world) much of what is mistakenly classified as “jewelry demand” should be classified as investment demand.

The reason for this is that in much of the developing world gold jewelry is considered a form of “savings” (or investment) rather than mere adornment. In 2011, jewelry demand actually declined, meaning that on a net basis true investment demand was likely essentially flat on the year.

Of interest, however, there was one group of gold-buyers whose appetite was nothing short of voracious in 2011: the world’s central banks. The entities who create the paper confetti in our wallets which they call “money” were busily dumping that paper to buy gold in 2011 – roughly 500% more than what they purchased in 2010 (from 77 tons to 440 tons). Even 2010 had been considered a very notable year in this respect, as it marked the first year in which the central banks had become net-buyers of gold in decades.